How Does Travel Get Back to Business?

Our culture is fundamentally different after weeks in social distancing and work-from-home arrangements. Massive layoffs and furloughs at a pace and scale we never experienced in the modern era compound these effects.

That said, humans are resilient. We will get back to business, even in one of the most impacted industries – travel.

Transient Will Take the Lead

First, “business as usual” doesn’t exist anymore.

Conferences and other non-essential travel were the first major revenue loss for hotels. Leisure and business transient travel continued until demand centers, like theme parks and offices, closed their doors.

Restarting business travel takes a major effort, especially where crowds are concerned.

Expect leisure travel to take the lead followed by business transient. These independent travelers will re-engage in recreational activities, sales calls, and support issues that would be more costly to handle remotely. Even though this relies heavily on demand centers re-opening, early indications show that people are ready to travel again.

Group travel, on the other hand, is going through a major shuffle. The prior status quo just doesn’t fit new standards associated with risks from large business (and even social) gatherings.

Hotels will get pressure to adopt new contract terms related to canceling large room blocks, and insurance companies will be in the spotlight to cover such potential losses. More on that later, but for this discussion, expect the already long booking window for big events to stretch further while the industry fidgets with new risks and mitigation.

Group travel forms the foundation that allows many hotel markets to drive higher rates as the booking window closes, especially during peak times. Expect a lack of demand in corporate and social group travel to prolong the revenue recovery.

Travelers Need New Signals

Brands emerged in the post-war United States as a way to signal safe, healthy, and overall reliable accommodations for a newly mobile society. Holiday Inn, Howard Johnson, and Marriott all proved to consumers that a branded property could serve them a healthy meal along with a safe stay while traversing our vast country.

Independent, lifestyle hotels popped on the scene in the past 40 years offering a different view on what a hotel should offer its guests. They are more stylized and in-tune with customer psychographics and the destination. Homesharing extended that concept by suggesting that hotels don’t have to be your only lodging option.

Social media and online travel agencies enabled the spread of independent lodging by offering social proof of the health and security of a given lodging option.

Unfortunately, past performance is no indication of future performance.

The massive shuffle in the travel labor market combined with outright closure of 80% of lodging facilities easily render most existing online reviews irrelevant. Additionally, consumers are looking for a more definitive stamp of approval that their chosen lodging meets quality and cleanliness standards.

Don’t expect governments to step in.

They’re stressed to capacity with health care and first responder needs, re-employment demands, tax payment deferral requests, and more. Combine that with new work arrangements, tightening budgets, and social distancing, and I’d be surprised to get anything new out of municipalities and states.

Companies, like Ecolab, are most likely to jump into action, here, even before brands.

They already supply hotels with the chemicals to keep rooms and public spaces clean. An additional inspection protocol and seal of approval would offer guests peace-of-mind that management companies are using chemicals appropriately.

Operations Are Fundamentally Different

Hotel asset managers got more action in the past two months than in the past six years.

Operating statements get pretty fat over the course of a bull market. Revenues continue increasing so many inflationary expense increases and service additions go unnoticed. However, any great asset manager knows that little by little, a little becomes a lot.

March financial statements are starting to hit asset managers’ desks, and many will be surprised by how quickly and efficiently operators can rise to the occasion and cut expenses.

Some of the fixed and variable expense cuts will remain in place, and others will return to pre-COVID levels. However, the exercise will fundamentally change expectations for operators.

Increased attention on artificial intelligence and personalization over the past few years will get a boost. Operators will continue to find ways to reduce staff, centralize operations, offset contract costs, and other strategies that carried them through this period.

Additionally, massive layoffs and furloughs gave hospitality professionals time to assess where they are in their careers and how that aligns with their aspirations.

Some are spending time beefing up their hospitality skill set to go back to their jobs. Others will be looking for new opportunities in the industry. However, I expect a large percentage will be looking outside the industry (if they haven’t left already).

Travel is a people business. People drive culture. This labor shuffle may have the biggest impact on operations.

Financial Risks Adjust

This pandemic dramatically and immediately impacted employees and guests. However, I don’t believe we’ve even begun to see the impact on financial markets.

Financial displacement caused by the pandemic may be more far reaching and deeper than many of the financial leaders preach, right now. Secure investments, like NNN restaurants, are now troubled assets held by a population that has no interest or capacity to work them out.

Insurance companies may be spared the full breadth of the impact to support hospitality operations with business interruption coverage. However, covered incidents may become a major negotiation point in renewals this year.

Heavy state and federal lobbying by insurers and insured is already in the works, and you can expect force majeure clauses to hit the courts within the next 6-18 months.

COVID-19 is reshuffling the financial deck, and everyone is picking up new lessons.

Real estate markets became very reliant on non-bank lenders in the past decade. This segment of the market is more flexible by being outside the supervision of bank regulators.

While these lenders handled most of the traditional risks well, we discovered serious systemic risks associated with leveraged debt funds. Expect increased scrutiny and regulation associated with private equity coming out of this experience.

Nobody escaped the pandemic unscathed. That is the reality.

Even the expected winners, like e-commerce giants, received a good bit of stress on their existing processes. Further, they’ll receive a counter-stress when flexing down as consumers emerge from their hibernation.

The most effective leaders will identify their areas of expertise and leverage that expertise to fill the many gaps in the market that this pandemic created. That is the real key to getting back to business regardless of what industry you’re in.

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